"They're out of stock in my size." We've all been there. Buying clothes can be a pain.
Beware of CEOs Who Chase 'Tails'
By Carlton Neel, CEO, Chaikin Analytics
"They're out of stock in my size."
We've all been there. Buying clothes can be a pain.
So on its face, solving that problem seems like an admirable goal. It's exactly what retailer Old Navy set out to do last summer...
In short, the company's top brass embraced "inclusive" sizing. Executives announced a plan to stock every size – from extra small all the way to 4XL – in every store.
Now, your first reaction might be something like, "That's nice. Everyone should be able to buy clothing that fits them." And you wouldn't be alone...
One shopper from Texas said, "Old Navy made me feel included and worthy of having clothes that look nice even though I'm a larger person."
Hearing that feels great! But there's a problem...
You see, retail doesn't involve infinite resources. Each store has limited space. And the inventory budget is limited as well.
So in pursuit of inclusiveness, Old Navy's stores cut down on their "middle sizes" inventory.
Shoppers noticed. And the decision cut into the company's sales... Old Navy simply didn't have enough stock in stores in the sizes that its customers wanted the most.
Folks, the CEO and the leadership team at Old Navy – and its parent company, The Gap (GPS) – were chasing "tails." Not cat and dog tails, of course. I'm talking about statistical tails.
In this case, Old Navy got a lot of "feel good" press in the beginning. But over time, it turns into a fatal business error if you're running a "mass market" operation...
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Almost every type of population fits inside a "bell curve." You might've seen it described visually like this before...
Don't worry, I'm not sending you back to math class. We just need to understand one simple part...
In a bell curve, about 68% of a population fits in the middle. And as I said, most populations fit under a distribution chart that looks very similar to this one.
That includes the distribution of people's weight...
Beyond the middle section, you're looking out toward the "tails." In other words... if you target those smaller chunks of the graph, you're focusing on fewer customers.
That's exactly what happened to Old Navy...
Old Navy made a feel-good statement. It tried to solve a problem with an admirable solution. But that move came with a business decision to chase the tails of the distribution.
It was a huge error...
The Gap lost $162 million last quarter. In comparison, the company made a $166 million profit during the same period in 2021.
Not surprisingly, investors are mad. The Gap's stock is down roughly 70% over the past year. That's a staggering loss.
And today, the company earns a "very bearish" rating from the Power Gauge...
Folks, Old Navy faced a perfect storm. And by extension, its parent company did as well. Company executives were chasing feel-good stories and statistical tails.
It might've looked like a great strategy when the economy was soaring. But once trouble started brewing, it proved to be a risky misstep.
Remember this lesson for your own investments...
The CEOs of mass market companies like Old Navy or The Gap need to focus on the middle of their populations. If they start making tail-chasing promises... beware.
That's like saying, "I want to sell less to our customers."
And of course, that's never a good thing.
Good investing,
Carlton Neel
Market View
Major Indexes and Notable Sectors
# Hld: Bullish Neutral Bearish
Dow 30
+1.72%
9
18
3
S&P 500
+2.44%
111
285
101
Nasdaq
+3.26%
13
61
25
Small Caps
+2.68%
289
1095
502
Bonds
+0.24%
Consumer Discretionary
+3.43%
4
21
33
— According to the Chaikin Power Bar, Small Cap stocks are somewhat more Bearish than Large Cap stocks. Major indexes are mixed.
* * * *
Top Movers
Gainers
ULTA
+12.47%
ADSK
+10.31%
MRNA
+8.73%
MPWR
+8.11%
TSLA
+7.33%
Losers
BMY
-1.87%
PM
-1.02%
CF
-1.02%
C
-0.87%
ZBH
-0.67%
* * * *
Earnings Report
Reporting Today
Rating
Before Open
After Close
HPQ
CRM
CHPT, STNE
No earnings reporting today.
Earnings Surprises
No significant Earnings Surprises in the Russell 3000.
* * * *
Sector Tracker
Sector movement over the last 5 days
Discretionary
+9.51%
Energy
+8.56%
Financial
+8.26%
Information Technology
+7.94%
Industrials
+6.39%
Staples
+6.08%
Materials
+5.99%
Real Estate
+5.83%
Utilities
+5.06%
Communication
+3.79%
Health Care
+3.27%
* * * *
Industry Focus
Mining Services
10
20
2
Over the past 6 months, the Mining subsector (XME) has outperformed the S&P 500 by +41.20%. Its Power Bar ratio, which measures future potential, is Very Strong, with more Bullish than Bearish stocks. It is currently ranked #5 of 21 subsectors and has moved up 1 slot over the past week.
Top Stocks
STLD
Steel Dynamics, Inc.
CMC
Commercial Metals Co
RS
Reliance Steel & Alu
* * * *
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This work is based on SEC filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. It may contain errors, and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility.
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